Date: 20010625
Docket: A-803-99
Neutral citation: 2001 FCA 213
CORAM: DESJARDINS J.A.
ROTHSTEIN J.A.
SEXTON J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
- and -
THE MANUFACTURERS LIFE INSURANCE CO.
Respondent
HEARD at Toronto, Ontario, on Monday, June 11, 2001
JUDGMENT delivered at Ottawa, Ontario, on Monday, June 25, 2001
REASONS FOR JUDGMENT BY: ROTHSTEIN J.A.
CONCURRED IN BY: DESJARDINS J.A.
SEXTON J.A.
Date: 20010625
Docket: A-803-99
Neutral citation: 2001 FCA 213
CORAM: DESJARDINS J.A.
ROTHSTEIN J.A.
SEXTON J.A.
BETWEEN:
HER MAJESTY THE QUEEN
Appellant
(Respondent)
and
THE MANUFACTURERS LIFE INSURANCE COMPANY
Respondent
(Appellant)
REASONS FOR JUDGMENT
ROTHSTEIN J.A.
[1] This appeal from a November 8, 1999 decision of O'Connor J.T.C.C. concerns capital tax on insurance companies under Parts I.3 and VI of the Income Tax Act R.S.C. 1985 (5th Supp.), c. 1. Capital tax is a specified percentage of the insurance company's taxable capital employed in Canada.
[2] Under accounting rules for life insurance companies under the Canadian and British Insurance Companies Act R.S.C. 1985 c. I-12, the Investment Evaluation (Canadian companies) Regulations SOR/79-216 P.C. 1979-553, March 1, 1979 and the Annual Statement (including balance sheet and income statement) in the form determined by the Minister of Finance, an insurance company is required to amortize into income, over a specified time period, gains or losses on disposition of bonds, stock, real estate and mortgages. The company is also required to recognize in its income over a specified time period, discounts or premiums, or gains or losses in the market value, of those assets while they remain in the portfolio of the company i.e. before disposition.
[3] The issue in this appeal involves the treatment, for capital tax purposes, of the unamortized or deferred portion of gains realized on the disposition of bonds, stock, real estate and mortgages. The Minister of National Revenue says they should be included in the taxable capital of the company as reserves or surpluses. The Tax Court Judge found they were not reserves or surpluses and allowed the respondent's appeal from the Minister's reassessment.
[4] Under subparagraph 181(3)(b)(ii) of the Income Tax Act, for the purposes of determining any amount in respect of the company's capital for capital tax purposes, the amounts reflected in the balance sheet accepted by the Superintendent of Financial Institutions are to be used.
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181(3) For the purposes of determining the carrying value of a corporation's assets or any other amount under this Part in respect of a corporation's capital, investment allowance, taxable capital or taxable capital employed in Canada for a taxation year or in respect of a partnership in which a corporation has an interest,
(a) [...]
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181(3) Pour déterminer la valeur comptable d'un des éléments d'actif d'une société ou tout autre montant en vertu de la présente partie afférent au capital d'une société, à sa déduction pour placements, à son capital imposable et à son capital imposable utilisé au Canada pour une année d'imposition ou afférent à une société de personnes dans laquelle une société a une participation:
a) [...]
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(b) subject to paragraph 181(3)(a) and except as otherwise provided in this Part, the amounts reflected in the balance sheet
(i) [...]
(ii) accepted by the Superintendent of Financial Institutions, in the case of a bank or an insurance corporation that is required by law to report to the Superintendent, [...].
shall be used
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b) sous réserve de l'alinéa a) et sauf disposition contraire de la présente partie, les montants à utiliser sont les suivants:
(i) [...]
(ii) soit ceux qui figurent au bilan accepté par le surintendant des institutions financières, s'il s'agit d'une banque ou d'une compagnie d'assurance tenue par la loi de faire rapport au surintendant [...]
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[5] It is common ground that the unamortized portion of realized gains in this case are not reflected on the balance sheet of the respondent as reserves or surpluses. The evidence establishes that the balance sheet was accepted by the Superintendent. Subparagraph 181(3)(b)(ii) requires that the amounts in respect of the company's capital be the amounts reflected in the balance sheet of the company accepted by the Superintendent. There is no scope for the Minister to change these amounts or characterizations which have been accepted by the Superintendent and they must be used for the purposes of capital tax.
[6] Yet, the Minister argues that subparagraph 181(3)(b)(ii) only requires that the respondent's balance sheet be used as the starting point and that adjustments or changes to the characterization of items on the balance sheet can be made for the purpose of assessing capital tax. For the reasons I have given, I do not think that this argument is open to the Minister. However, for completeness, I will briefly deal with the Minister's argument.
[7] Subsection 181(1) provides in relevant part:
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181. (1) For the purposes of this Part,
[...]
"reserves", in respect of a corporation for a taxation year, means the amount at the end of the year of all of the corporation's reserves, provisions and allowances (other than allowances in respect of depreciation or depletion) and, for greater certainty, includes any provision in respect of deferred taxes.
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181. (1) Les définitions qui suivent s'appliquent à la présente partie.
[...]
« _réserves_ » Montant à la fin d'une année d'imposition constitué de l'ensemble des réserves et provisions d'une société, y compris les réserves pour impôts reportés. En sont exclus l'amortissement cumulé et les provisions pour épuisement.
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There is no statutory definition of surplus.
[8] The evidence, in the form of facts agreed between the parties, is that under accounting principles applicable to the respondent and to the preparation of its balance sheet, the respondent's unamortized realized gains are not reserves, provisions, allowances or surpluses.
[9] Nonetheless, the Minister argues that some more general definition of reserves or surpluses should govern. The only basis for this argument seems to be a reference in Oerlikon Aérospatiale Inc. v. Her Majesty the Queen, 99 D.T.C. 5318 (F.C.A.), where an "advance" was to be reflected in capital because it contributed to "the financial resources available to the appellant". The Minister says unamortized realized gains are financial resources available to the respondent in this case. However, the Minister's argument ignores precisely what was said by Noël J.A. in Oerlikon:
The effect of an advance, be it in the sense of a payment on account or a loan, is to make the amount of money it represents available to the person or corporation which receives it. In the instant case, the advances were an integral part of the financial resources available to the appellant at the end of its 1989 fiscal year according to the financial statements it filed, and nothing either in the legislation or the tax policy which led to its enactment indicates that Parliament intended to exclude advances from the tax under Part I.3.
In the present case, unamortized realized gains were not shown as financial resources available to the respondent according to its financial statements.
[10] Further, the Instructions for the Completion of the Annual Statement provides,
Other than in the defined areas of differences covered in the legislation, the underlying basis for accounting and financial reporting incorporated in the prescribed form is intended to conform to Generally Accepted Accounting Principles.
The balance sheet in this case must conform to legislative and regulatory requirements and in the absence of such requirements, the intention is that it conform to GAAP. I see nothing in the facts of this case that indicates that it does not, or should not, do so.
[11] The appeal should be dismissed with costs.
"Marshall Rothstein"
J.A.
"I concur
Alice Desjardins J.A."
"I agree
J. Edgar Sexton J.A."
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